Investment Thesis Based on a simplified cash flow model DAL is currently trading at roughly a 20% discount.

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1 Delta Air Lines Inc. Airline October 7 th, 015 Delta Air Lines Inc. Exchange: NYSE Initiating Coverage Daniel.Brenner@orangevaluefund.com Security Ticker: DAL Anisa Khalouf Junior Analyst Anisa.Khalouf@orangevaluefund.com Business Description Delta Airlines Inc. (DAL) provides air transportiation for passengers Buy DAL Equity DAL Statistics as of 10/6/015 Share Price as of 10/6/15 $ Week Range $ $51.47 Market Cap $40.11B Revenue $40.B Net Income $659M EBITDAR $8.11B Enterprise Value $45.10B EV/EBITDAR 5.56x and cargo worldwide, operating on its global route network. Delta is among the top six airlines in the United States, accounting for 17% domestic market share, and maintains a major international presence as it provides service to over 334 destinations among 64 countries. DAL operates in two business segments, Airlines and Refinery. DAL s global route network allows them to operate in every major market, both domestic and international, and is centered around a network of hub and international gateway airports. The airports within this network that DAL operates out of include Amsterdam, Atlanta, Detroit, Los Angeles, Minneapolis-St. Paul, New York-LaGuardia, New York-JFK, Paris-Charles de Gaulle, Salt Lake City, Seattle, and Tokyo-Narita. Delta s network is supported by a fleet of aircraft that varies in size and capabiliti$es, thus allowing Delta to adjust aircraft to the demand of the network Investment Thesis Based on a simplified cash flow model DAL is currently trading at roughly a 0% discount. DAL strategic investments in international airlines will allow for an increase in international growth in the upcoming years. DAL is the only airline that owns and operates its own refinery and is benefits significantly from this by lower fuel prices and actually generating profit from the operations of the refinery. DAL is safe because of their investment grade balance sheet and shareholder friendly management, which plans to return 50% of their cash flows back to shareholder in the next 3 years. 11

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3 Table of Contents Cover Page.1 Growth Catalysts Safety and Risk Analysis Segments....8 Management Recent M&A Activity Partnerships Flight Composition Simplified DCF Analysis 14 13

4 Growth Catalysts: International Equity Investments China: Delta is aggressively trying to expand globally by taking equity interest in international airlines. Delta Air Lines just increase their equity stake in China Eastern Airlines Corp to 3.5% which also included a long-term exclusive partnership. Part of their exclusive partnership is to building a large hub in Shanghai. China Eastern runs 35 flights to four US cities while Delta runs 8 flights to China a week. This exclusive partnership will also allow Delta and China Eastern to collaborate to improve efficiency for both of their airlines. China is the second largest source of foreign tourist for the US and it is expected to be the largest source in the next few years. Delta is concentrated on expanding into China because there still is a lot of growth in China. Just in the past five years their Chinese network has tripled. Delta is making the first equity cooperation deal with a Chinese airline since 006. This will allow Delta to more efficiently expand into China and allow for significant growth. Latin America: In Latin America, Delta has made strategic equity investments in two major airlines: GOL and AeroMexico. Delta currently has a 4.4% equity stake in AeroMexico. They have the potential to buy up to 58.9 million more shares nu using options they have purchased which mature in May 016. With the purchase of their equity, Delta also was granted an enhanced operating agreement which allows for seamless use of their routes and planes. AeroMexico is currently the largest domestic airline serving 58 destinations. Delta also expects in the next receive antitrust immunity and establish a joint venture with AeroMexico in the coming months. This will drastically increase the amount of travel and Delta will be able to take advantage of this through AeroMexico. In terms of market share between US and Mexico by seat capacity, American has 4%, United has 19%, Delta has 9%, and AeroMexico has 19%. But after the planned joint venture AeroMexico and Delta would leap frog to the top and have the most market share. The second airline Delta has invested in within the Latin America area is GOL. GOL is the second largest Brazilian airline. Recent, 13-G shows that Delta increased their equity positon in GOL to 9.5% by purchased conditional voting preferred shares. Delta also is the guarantor for a 5 year $300 million term loan which is secured by GOL s owner s interest in Smiles, which is GOL s publicly traded loyalty program. Also, once the open skies agreement is established between Brazil and the US, Delta plans on filing for antitrust immunity as soon as that is established. Overall, in Latin America Delta has taken major steps to try and expand their market share. They also bought these equity interest when the prices were very depressed, which shows managements market awareness. They are full invested in these companies and have said they advising them and helping them build up their airline. By the end of next year they will have an immunized profit sharing joint venture with the leading carriers in the two largest markets in Latin America. 14

5 Virgin Atlantic Delta has made a significant strategic equity investment in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airlines, holding a 49% stake in the company. This investment allows Delta to obtain greater access to United Kingdom hubs and increase mobility across the transatlantic by offering an increased number of flights via codesharing. Customers of Delta now have choices between a greater number of routes across the transatlantic, particularly flights between New York and London, one of the most highly traveled business routes. In the summer of 015, the airlines jointly offered 10 flights per day between these two cities, with departures every 30 minutes from New York-JFK. During the first 1 months of the joint venture, Delta and Virgin Atlantic together flew more than 4 million passengers between the U.S. and U.K. and are continuing this standard of growth into the fourth quarter. There are a total of 39 transatlantic flights flown on the joint venture per day. New routes have been launched since the start of DAL and Virgin Atlantic s joint venture including Seattle and Philadelphia to London and New York to Manchester, allowing DAL to tap into these highly traveled European gateway airports. Operational Efficiency: The table below shows the operational efficiency of Delta. Their load factor, price of jet fuel, and yield per RPM are the some of the highest of any competitor. There are few factors that contribute to the exceptional operational efficiency of Delta. One huge factor, is that they have the best maintenance team in the industry. Management boasts about their superior maintenance team. Even though their aircrafts are an average age of around 17 years they are still operate more efficiently than their competitors. Another reason, that they are operating so efficient is because they are actually keeping capacity relatively flat. At first this might seem like an unfavorable thing but it is actually part of their strategy moving forward. They are restructuring their routes and fleet so that each plan gets the highest utilization and generate the most revenue from their ASM. Company ASM (millions) Load Factor Yield Per RPM CASM (cents) Price/Gallon Delta Airlines 39, % American Airlines 65, % Southwest Airlines 131, % United Continetal 46, % Alaska Air Group 36, % Jetblue 44, % Hawaiian 17, % Competitors Average 140, %

6 Refinery Segment Delta is the only airline that has their own in-house refinery. In 013, Delta purchased Monroe refinery for $180 million. Monroe produces 00,000 barrels per day and 40,000 of which is jet fuel. Monroe energy provides roughly 30% of the daily fuel consumption of all the hubs in New York on a daily basis. For the first time since 013, which is when Delta purchased the refinery, it has become profitable. It is projected that by the end of 015 that the refinery will have generated $30 million in profit. This refinery allows Delta to have a competitive advantage against all other competitors. They currently lead the industry on a per-barrel cost basis of $1.8/barrel as seen in the table above. They project that their price per barrel to get down $1.75 by next quarter. Delta has not been able to recognize the value of this refinery because they had a significant amount of hedges on before the purchase that had their cost per gallon close to $3. This refinery will allow Delta to increase margins moving forward as well as providing an additional source of income. Strategically Purchasing Aircraft Delta CEO Richard Anderson publicly stated that he see an Aircraft Bubble in the wide body aircraft market. Anderson sees an opportunity in buying used aircraft because there is an overproduction of wide body aircraft because of cheap financing. Delta has plains to buy roughly a dozen 10 year old Boeing 777 aircraft from Singapore Airline for around $10 million per aircraft. Resale value of these aircraft have dropped 14% just this year. More Boeing 777 aircraft would allow for higher margin flights to Asia and South America.Delta s incredible maintenance team allows them to better preserve their fleet which is why their margins are so high even with an old fleet. This also exemplifies management intense concentration on providing value. Delta s Branded Fares Program Delta has adopted a branded fares program in which customers are able to gain additional amenities and/or flexibility in their flight experience by paying a fixed price to upgrade to a particular Delta class. Delta s competitors, American Airlines and Frontier Airlines, spearheaded the branded fares program movement; some industry specialists say use of branded fares is the direction airlines are heading in. Delta has since launched their own program, which competes with these airlines by offering a wider range of products than both American and Frontier. Delta s branded fare program offers a breakdown of 5 products: Delta One, First Class, Delta Comfort+, Main Cabin and Basic Economy. The revenue from Delta Comfort+ has increased 18% this past quarter and the product is generating additional annual revenue of $350 million Y/Y. Delta is expecting to add more Delta Comfort+ seats as it upgrades its fleet. Delta is expected to generate $1.5 billion by 018 in revenue as a result of this program, according to CFO Paul Jacobson Delta s Sky Club now has over 00 locations worldwide for the use of Delta One customers 16

7 Safety: Debt Composition Delta outstanding debt is very manageable to their strong and consistent cash flows coupled with a strong cash position of 3 billion. Their total debt outstanding is $8.9 billion. Delta s debt is 44.84% bonds,.38% term loans outstanding, 17.75% revolver outstanding, and 8.70% municipal bonds. Their debt is relatively evenly spread out as you can see from the table below: Manageable Debt: Delta can be a considered a safe investment by looking at their debt multiples and cash flow. Delta s net debt to EBITDAR is.7x. They are generating significant cash flow, which makes their debt very manageable. Additionally, their EBITDA over the past five years has increased 0% making it even safer because their cash flows are not declining. Their increase in EBITDA is reflective of their ability to continuously take market share from their competitors. Stock Repurchase and Capital Returns to Shareholders: Recently, Delta has stated that they intend to return at least 50% or around $6 billion of their free cash flows back to the shareholder through 017. One way Delta intends to do this is it increase their share buyback program from $500 million to $5 billion. This repurchase program is required to be completed by year end 017. Based last 1 month average of the 17

8 common stock price of $44.76, Delta would repurchase roughly 113 million shares which is 14% of the current shares outstanding. Another shareholder friendly initiative Delta just recently announced is an increase in their quarterly dividend by 50% to $0.135 per share starting in September. It is clear that they are extremely shareholder friendly company concentrated on returning value to shareholders. Risk: As with other companies in the airline industry, Delta is dependent on jet fuel cost as a main operating expense of their business. If fuel prices are high, including the cost of crude oil, their operating results could be negatively affected. However, Delta has acquired an operating refinery, Monroe, which allows them to produce their own jet fuel and thus hedge the volatility in crude oil prices. This fuel-hedging program may also have an adverse effect if they have to rebalance or make market-to-market adjustments to their portfolio in accordance with market conditions. Geopolitical unrest could also have an adverse effect on Delta s operating results and financials as such threats or fear of disturbance abroad can lead to increased security, insurance costs, impacts from avoidance of flight paths over areas of conflict, and lost revenue from refunded tickets and decrease in sales. Similarly, any political disturbance or contention between oil-producing countries could impact crude oil and supply, leading to potential shortages in the future which could adversely affect production rate and financial results. 18

9 Segments: Delta operates under two business segments: Airlines segment and Refinery segment. The Airlines segment is responsible for the air transportation of passengers and cargo through their global route network. The refinery segment is responsible for providing jet fuel to the airlines segment through their own production and through agreements with third parties. The refinery segment is for the benefit of the airline except on occasions when the refinery will sell fuel by-product to third parties; these sales are accounted for under other revenue and other operating expenses. Geographic Segments: Total Revenues from Segments: $40,36.0 Revenues FY 014 Atlantic - $6,757.0 (16.7%) Pacific- $3,948.0 (9.8%) Latin America - $,759.0 (6.8%) North America $6,898.0 (66.6%) 19

10 Key Management: Richard Anderson Chief Executive Officer and Director. Anderson has over 5 years of aviation experience, starting in 1987 at Continental Airlines. He had previously been with Northwest Airlines for 14 years where he served as CEO from 001-November 004. Anderson joined Delta from United Health Group in September 007. He had served as Executive Vice President and President of Commercial Services at United Health. Anderson is leading Delta to become an innovative airline that deviates from the traditional business model of the industry, focusing on maximizing employee engagement and customer-centered values. Anderson has also serves as chairman of the Airlines for America Board of Directors and the international Air Transport Association Board of Governors. He sits on the boards of Medtronic Inc. and Cargill. Edward H. Bastian- President and Director. Bastian is also a member of the Board of Directors for Aeromexico, GOL and Virgin Atlantic, all of which are engaged in partnered agreements with Delta. He is responsible for expanding relationships with global partners through the SkyTeam alliance program and Delta s joint ventures. Ed Bastian and his team are also credited for the purchase of a refinery for Delta, which is expected to save the airline $300 million annually. Before becoming President, Bastian served as executive vice president and chief financial officer for Delta beginning in 005 as well as serving as the chief restructuring officer. He joined Delta in 1998 as vice president-finance and Controller. He has great experience in finance and auditing, as he served for vice president-finance for Pepsi Cola International, vice president-business Processes and reengineering for Frito-Lay, vice president-finance and Controller for Frito Lay International, and as a partner in the New York audit practice of Price Waterhouse. He also served as the strategic planning partner for PWC s New York Region. Glen W. Hauenstein- Executive Vice President, Chief Revenue Officer Hauenstein has served a role in leading positions in the airline industry for nearly 0 years. He has had his position as CRO of Delta since August 013. Before being appointed to this position Hauenstein served as Executive Vice President and Chief of Network Planning and Revenue Management of Delta for 7 years. Hauenstein is credited for the addition of more than 70 destinations to Delta s global network route, including the fist non-stop service to Africa by a U.S. carrier. Under his leadership Delta has also expanded its reach in Asia and invested in stakes in GOL and Aeromexico in order to increase access to the growing Latin market. He started his career in 1987 at Continental and has since attained executive roles for Alitalia, where he was the Chief Commercial Officer and Chief Operating officer. Richard B. Hirst-Executive Vice President, Chief Legal Officer Hirst joined Delta from Northwest Airlines where he served as Senior Vice President in Corporate Affairs and General Counsel. His experience as an executive in the industry spans over the course of nearly 30 years, starting from his beginnings as Vice President-General Counsel and Secretary for Continental Airlines in

11 Before taking his role as Chief Legal Officer for Delta, Hirst was the Executive Vice President for Network Planning and Revenue Management of Delta from April 006-July 013. Paul A. Jacobson-Executive Vice President, Chief Financial Officer Jacobson has been a key asset to Delta s finance division since he joined the company in 1997 as a financial analyst. He has since served several positions including Vice President and Treasurer in August 005. He adopted his role as CFO for Delta in March 01. Jacobson s contributions have helped Delta return to the S&P 500 index, increase their credit rating, and reduce debt off the balance sheet by $10 billion, to name a few. Jacobson has a bachelor s degree in aviation management and master s in business administration from Vanderbilt University coupled with over 0 years worth of financial experience, making him a great leader for Delta. Joanne D. Smith-Executive Vice President-Chief Human Resources Officer Smith has over 30 years of experience in the travel industry, joining Delta in 00 as the Vice President of Marketing for Song. She had also been appointed to her role of Senior Vice President- In-Flight Service from March 007-September 014 before becoming the Chief of Human Resources. Under her role as CHR, she is responsible for the oversight and support of human capital needs at Delta, including talent management and engagement of Delta s already 80,000 employees. Before her time at Delta, Smith was the President of Song. She has been recognized by major media outlets including the WSJ as one of the most powerful women to watch. W. Gil West-Executive Vice President-Chief Operating Officer Before joining Delta management in 008, West was the President and CEO of Laidlaw Transit Services and also held roles at Northwest Airlines, United Airlines and the Boeing Company. He then took on the position of Senior Vice President of Airport Customer Service for Delta for 4 years and the Senior Vice President of Airport Customer Service and Technical Operations for two years. Under his current position, West is responsible for maintaining the safety and reliance of Delta s operations worldwide; this includes a span of more than 70,000 employees across the company s many divisions. 111

12 Recent M&A Activity: 008 acquisition of Northwest Airlines, much attributed to the work of President Edward Bastian. o Acquired Northwest Airlines for $3.1 billion in stock. Northwest shareholders will receive 1.5 Delta shares for each Northwest share. Delta pilots will be provided a 3.5% equity stake in the new company. Non-pilot employees of both companies will get a 4% equity stake in the new airline upon closing of the deal. o Both sell-side and buy-side termination fee of $165mm. o Total transaction size: $10, mm o Implied Equity Value $3, mm December 009- Buyer- Aeroism, Inc.; December 009- Buyer- Segrave Aviation, Inc. December 001-Buyer-GOL Lineas Aereas Inteligentes S.A. June 01-Buyer-Phillips 66, Trainer Oil Refinery; Monroe Energy, LLC (wholly owned subsidiary of DAL) responsible for acquire. June 013-Buyer-Virgin Atlantic Airways Limited Partnerships: In terms with their global route network, DAL has alliance relationships with both international and domestic carriers. DAL s international alliances are in integral part of their business as it permits them access into international markets and allows for market expansion. These global alliances have allowed them to provide service to 61 destinations in 119 countries. Their international alliances include three joint ventures with foreign carriers, including the following: A transatlantic joint venture with Air France-KLM and Alitalia A transatlantic join venture with Virgin Atlantic Airways (covers non-stop routes between the UK and North America). In addition to the joint venture, Delta owns a non-controlling 49% equity stake in Virgin Atlantic Airways parent company, Virgin Atlantic Limited. A transpacific joint venture with Virgin Australia Airlines and its affiliates, which covers operations on routes between North America and Australia/New Zealand. Terms of Joint Ventures: The arrangements made with the aforementioned carriers provide joint commercial operation within their respective geographic regions, including the sharing of profits and losses generated by carriers on the joint venture routes, joint marketing and sales, coordinated pricing and revenue management, networking planning and scheduling and coordinated activities. Although Delta does not have an equity stake in Air France, they jointly share bottom line for transatlantic activity. 11

13 International Strategic Alliances: In addition, DAL has established Enhanced Commercial Agreements with Latin American carriers by making equity investments in both Grupo Aeromexico, S.A.B. de C.V., the parent company of Aeromexico and in GOL Linhas Aereas Inteligentes, S.A., the parent company of VRG Linhas Aereas (GOL). They maintain an exclusive commercial relationship with each of these said carriers. Delta made this investment because Aeromexico and GOL operate in Latin America s two largest markets, Brazil and Mexico, thus providing access to these markets. DAL has also established a joint venture with Aeromexico in terms of airframe maintenance, repair and overhaul operation. DAL is also a member of the SkyTeam global airline alliance, which enables them to integrate route networks with other participating airlines in order to increase codesharing and frequent flyer programs, air lounge access and cargo operations. These efforts enhance the customer service Delta provides its passengers as it contributes to their marketing alliance agreements, as well as expand their global presence. The participating carriers include: Aeroflot, Aerolineas Argentinas, Aeromexico, Air Europa, Air France, Alitalia, China Airlines, China Eastern, China Southern, CSA Czech Airlines, Garuda Indonesia, Kenya Airways, KLM, Korean Air, Middle East Airlines, Saudi Arabian Airlines, Tarom, Vietnam Airlines and Xiamen Airlines. Delta has alliance arrangements with each of these airlines via SkyTeam. Domestic Alliances: Delta has a domestic alliance with both Hawaiian and Alaska Airlines which includes mutual code sharing, frequent flyer participation and airport lounge access. Hawaiian Airlines has been aggressively expanding into Asian markets, thus Delta s sharing of code and route network enables them to further expand into this area of the market. Alaska Airlines is the 7 th largest airline domestically and their alliance gives Delta access to their Seattle hub, increasing number of international routes. Delta Connection: Regional Carrier Alliance Delta has air service agreements with regional air carriers within the U.S. that give traffic to their route by serving passengers out of small and medium-sized cities. These agreements allow Delta to match capacity with demand in these areas, which contributed approximately 18% to passenger revenue in 014, amounting to a total of $6.6B at year end 014. Delta s regional carrier program, Delta Connection, allows them to have contractual arrangements with regional carriers to operate aircraft using their DL designator code. These contractual arrangements have been made with ExpressJet Airlines, Inc. and SkyWest Airlines, Inc., Shuttle America Corporation, Compass Airlines, Inc., and GoJet Airlines, LLC, and Endeavor Air, Inc. These contractual arrangements with regional carriers are primarily capacity purchase arrangements, in which Delta is able to control the scheduling, pricing, reservations, ticketing and seat inventories for the regional 113

14 carrier s flights. Delta is thus entitles to all ticket, cargo, mail, in-flight and ancillary revenues that result from said flights in exchange for an amount paid to those airlines that is determined from cost of operating those flights and other market rate approximations for those services. Under the contractual terms Delta has the right to terminate the agreement or remove some of the aircrafts from the agreement at certain future dates. These purchase agreements are long-term, with initial terms of at least 10 years. Strategy: Fleet Composition Delta is currently in the midst of revamping their fleet. They currently have a relatively older fleet when compared to their competitors. They currently have 184 commitments to purchase, 17 commitments to lease, and 33 additional options to purchase. They plan on having less planes but that are larger and more fuelefficient. This will increase their load factor making CASM (cost per available seat mile) decrease. 114

15 Simplified DCF Valuation: Delta Air Lines: Simplified DCF Model Estimated Multiple based on Growth and Unlevered cost of equity assumptions below M_d 1.4x (1- t) 70.0% EBITDA*x em: 18.% j/em.4% Multiple for n periods (Term I).30x j: 4.1% 1- j/em 77.6% PV of Terminal Multiple (Term II) 4.96x r_d: 7.1% 1/(rho- ge) 50.00x Leverage Multiple (Term III) 0.31x t 30.0% ((1+ge)/(1+rho))^n 0.91x Estimated Multiple: M_ed 7.6x Market EV/EBITDA 5.6x 1/rho 10.00x Price per share at M_ed (GC): $ 59.6 (1- t)*(1- j/em) 0.54 Surplus Cash per share (RC): $ K Data Minority Equity Interest $0.45 CAPEX + NWC $,6.00 (1- t)(1- j/em)+((j- cw)/em)) $ 17,131 Total value per share $ D&A $ 1, j/em- r_d*m_d Discount (Premium) 9.6% Sales $ 40, /rho*(1+rho)^n 6.1x Number of growth years 5 EBITDA $ 7,455.0 (1+ge)^n Assumed Unlevered cost of equity 10.00% EBIT $ 5, cw 6.41% Imput Growth in EBITDA 8.0% Ajusted LT Debt $ 9,4.0 Price per share $ 45.4 LT Debt $ 7, # of Shares outstanding (000) Surplus Cash $ 3,79.0 Float (%) 100% Mkt Cap $ 36,111. Float Shares EV $ 41,561. Interest $ Extra Borrowing $ - Anticipated M_d 1.0 Annual Rent $ Capitalized Leases $ 1, EBITDAR Analysis? Yes (Ebitda - Capex)/EV 11.63% WACC - Equity Interest Number of Shares Precentage of SharesOutstanding Current Price Value Of Delta's Equity Stake China Eastern Airlines 465,910, % 0.60 $78,334, GOL 3,97, % 0.91 $9,964, AeroMexico 30,18, % 1.57 $47,387,08.35 Value/Share $0.45 The valuation generated by this model indicates that Delta is trading at 9.6% discount. This is with an assumed EBITDA growth, which is a conservative estimate, based upon historical growth and Delta s aggressive domestic and global growth strategies. 115